Weekly CEF Market Report - December 7, 2020

Macro Picture

Stocks continue to build on their gains from November into December pushing to new record highs. Energy shares were the top performer on the week thanks to OPEC and other major oil producers reaching an agreement to ease output cuts over the next year.

The month of November finished out on Monday with some massive gains including the Russell 2000 ("small caps") recording their best monthly gain since its inception in 1978.

Rising hopes of a new round of stimulus are supplanting vaccine news as the catalyst for the markets. Sentiment has risen in the last few days as a bipartisan group of senators proposed a $908B relief package.

Job gains continue to slow each month and were only 245K in November, about half of the consensus expectations. The unemployment rate fell to a pandemic low of 6.7%, but this was partly due to a drop in the labor force participation rate—perhaps reflecting the need of parents to stay home as schools and day-care facilities closed in response to rising infection rates.

There appears to be a consensus view materializing for 2021. Some notes on that:

• Similar to the end of 2017/beginning of 2018, there appears to be a clear consensus currently in terms of year-ahead trading themes.
• Unfortunately, the consensus view rarely plays out in its entirety as 2018 reminds us. For asset allocators, what is thus important is scale exposures to avoid an overly concentrated portfolio.
• One way of scaling exposures to the consensus trading themes is by limiting exposure to the most crowded ones.
• That is being overweight: non-US (ex EM) vs. US equities, EM credit and EM rates, US HY over IG credit, Euro Peripheral credit; while Short the US dollar vs. cyclical DM currencies, Long Copper, and Long Bitcoin, all appear crowded trades at the moment on our metrics.
• Luckily, and different to the beginning of 2018, we find several other year-ahead consensus trading themes to be less crowded.
• In particular, overweight EM vs. DM equities, EM FX, Value vs. Growth at individual stock level, Short Duration and steepeners in core bond markets, Long Oil, and Long Gold, all appear less crowded trades at the moment on our metrics.
• The “Long equities” theme seems crowded tactically with elevated positioning by momentum traders and rebalancing flows by balanced mutual funds and pension funds posing some downside risk into year end.
• But different to the beginning of 2018, our medium-term equity positioning indicator based on the implied equity allocation of non-bank investors globally stands at average rather than overbought levels.
• Thus any equity correction in the near term would represent a buying opportunity as, in our opinion, we are only in the middle of the current bull market.

CEF Recap

Discounts tightened again for the fifth straight week and are just under 4% in fixed income CEFs. You can see just how much ground in the chart above we've recovered in a short amount of time. The rally has been broad with all sectors participating.

Fixed income CEFs are now at -3.98% breaching the -4% threshold this week and closing in on Jan 1, 2020 levels of 3.05%. We are still about 2.5% off of the February 22, 2020 levels of -1.27%.

There really are no cheap sectors left with a few esoteric equity areas still sporting a negative one-year z-score (indicating their discounts are cheaper relative to average). Just look at the worst price moving sectors in the Statistics section below. It was tax-free munis and they were UP 0.6%!

That shows the market we are currently in. Read on for more portfolio responses.

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